temptation for embezzlement to the deposit banker than grain to
the warehouseman. Gold coin and bullion are fully as fungible as
wheat; the gold depositor, too, unless he is a collector or numismatist,
doesn’t care about receiving the identical gold coins he
once deposited, so long as they are of the same mark and weight.
But the temptation is even greater in the case of money, for while
people do use up wheat from time to time, and transform it into
flour and bread, gold as money does not have to be used at all. It
is only employed in exchange and, so long as the bank continues
its reputation for integrity, its warehouse receipts can function
very well as a surrogate for gold itself. So that if there are few
banks in the society and banks maintain a high reputation for
integrity, there need be little redemption at all. The confident
banker can then estimate that a smaller part of his receipts will be
redeemed next year, say 15 percent, while fake warehouse
receipts for the other 85 percent can be printed and loaned out
without much fear of discovery or retribution.
The English goldsmiths discovered and fell prey to this temptation
in a very short time, in fact by the end of the Civil War. So
eager were they to make profits in this basically fraudulent enterprise,
that they even offered to pay interest to depositors so that
they could then “lend out” the money. The “lending out,” however,
was duplicitous, since the depositors, possessing their warehouse
receipts, were under the impression that their money was
safe in the goldsmiths’ vaults, and so exchanged them as equivalent
to gold. Thus, gold in the goldsmiths’ vaults was covered by
two or more receipts. A genuine receipt originated in an actual
deposit of gold stored in the vaults, while counterfeit ones, masquerading
as genuine receipts, had been printed and loaned out
by goldsmiths and were now floating around the country as surrogates
for the same ounces of gold.4
90 The Mystery of Banking
4See ibid., p. 72.
5By A.D. 700–800 there were shops in China which would
accept valuables and, for a fee, keep them safe. They would
honour drafts drawn on the items in deposit, and, as with the
goldsmith’s shops in Europe, their deposit receipts gradually
began to circulate as money. It is not known how rapidly this
process developed, but by A.D. 1000 there were apparently a
number of firms in China which issued regular printed notes
and which had discovered that they could circulate more notes
than the amount of valuables they had on deposit.
Tullock, “Paper Money: A Cycle in Cathay,” Economic History Review 9
(August 1957): 396.
The same process of defrauding took place in one of the earliest
instances of deposit banking: ancient China. Deposit banking
began in the eighth century, when shops accepted valuables and
received a fee for safekeeping. After a while, the deposit receipts
of these shops began to circulate as money. Finally, after two centuries,
the shops began to issue and hand out more printed
receipts than they had on deposit; they had caught onto the
deposit banking scam.5 Venice, from the fourteenth to the sixteenth
centuries, struggled with the same kind of bank fraud.
Why, then, were the banks and goldsmiths not cracked down
on as defrauders and embezzlers? Because deposit banking law
was in even worse shape than overall warehouse law and moved
in the opposite direction to declare money deposits not a bailment
but a debt.
Thus, in England, the goldsmiths, and the deposit banks
which developed subsequently, boldly printed counterfeit warehouse
receipts, confident that the law would not deal harshly with
them. Oddly enough, no one tested the matter in the courts during
the late seventeenth or eighteenth centuries. The first fateful
case was decided in 1811, in Carr v. Carr. The court had to decide
whether the term “debts” mentioned in a will included a cash balance
in a bank deposit account. Unfortunately, Master of the
Rolls Sir William Grant ruled that it did. Grant maintained that
since the money had been paid generally into the bank, and was
not earmarked in a sealed bag, it had become a loan rather than
Deposit Banking 91
a bailment.6 Five years later, in the key follow-up case of
Devaynes v. Noble, one of the counsel argued, correctly, that “a
banker is rather a bailee of his customer’s funds than his debtor . . .
because the money in . . . [his] hands is rather a deposit than a
debt, and may therefore be instantly demanded and taken up.”
But the same Judge Grant again insisted—in contrast to what
would be happening later in grain warehouse law—that “money
paid into a banker’s becomes immediately a part of his general
assets; and he is merely a debtor for the amount.”7
The classic case occurred in 1848 in the House of Lords, in
Foley v. Hill and Others. Asserting that the bank customer is only
its creditor, “with a superadded obligation arising out of the custom
(sic?) of the bankers to honour the customer’s cheques,”
Lord Cottenham made his decision, lucilucidly if incorrectly and
even disastrously
No comments:
Post a Comment